Stocks Beating Bonds for First Time Since 2009: Australia Credit

Glenn Stevens, governor of the Reserve bank of Australia, cut the cash rate to match a half-century low of 3 percent this month. Photographer: Mark Graham/Bloomberg

Dec. 24 (Bloomberg) -- Australian stocks are set to beat
bonds for the first time since 2009 as record-low yields prompt
investors to favor the developed world’s highest dividends.

The Bank of America Merrill Lynch Australia Broad Index of
corporate and government bonds gained 7.6 percent this year,
compared with a 20 percent surge for the S&P/ASX Accumulation
200 Index. Global stocks returned 17 percent, outpacing the 5.4
percent for debt securities. Commonwealth Bank of Australia, the
country’s biggest lender, handed equity investors a 35 percent
return in 2012, almost four times more than debtholders.

UBS AG and Citigroup Inc. predict further equity gains in
2013, driven by Australia’s average forecast dividend yield of 5
percent, the highest among the world’s 12 biggest stock markets.
Benchmark 10-year sovereign yields sank to a record-low 2.698
percent this year as the Reserve Bank of Australia undertook the
most aggressive interest-rate cuts among advanced economies.

“Lower rates for cash and bonds will ultimately help drive
more allocation towards equities,” said George Boubouras,
Melbourne-based head of investment strategy at UBS AG’s
Australian wealth management unit, who forecast Australian stock
prices will rise 6.8 percent by the end of 2013. The Swiss bank
has about $1.5 trillion under management. “Equity market
valuations are compelling.”

Share Returns

The S&P/ASX 200 Accumulation index, which includes
reinvested dividends, is poised to top total returns on the MSCI
World Index of developed-market equities for the first time in
three years, Bloomberg data show. The global measure has a
forecast dividend yield of 3 percent for 2013, the data show.

Australia’s government bonds climbed in 2012 as foreign
investors, including central banks, sought the highest-yielding
debt among the seven nations with stable AAA grades from all
three major ratings companies. Benchmark 10-year yields were at
3.35 percent as of 2:39 p.m. in Sydney, with the gap to U.S.
Treasuries falling to 158 basis points, from as much as 214
basis points in March.

The spread between the S&P/ASX 200 dividend yield and
Australia’s cash rate this month rose to the highest since July
2009, according to data compiled by Bloomberg.

Widening Spread

The gap has widened as RBA Governor Glenn Stevens cut the
cash rate to match a half-century low of 3 percent this month to
bolster the economy as a record mining investment boom
approaches its peak. That was the sixth reduction in 14 months,
completing the most aggressive rate cuts among advanced
economies.

Commonwealth Bank, Westpac Banking Corp. and Telstra Corp.,
Australia’s largest phone company, contributed the most to the
benchmark stock index’s increase this year, according to
Bloomberg-compiled data. Commonwealth Bank shares climbed 4.4
percent this month to close at a record A$62.33 today in Sydney.

The perceived risk of holding the companies’ bonds also
declined, credit-default swap prices show. The benchmark Markit
iTraxx Australia index, which includes the three companies, fell
57 basis points this year to 123 on Dec. 21, according to data
provider CMA.

Australia’s banks, the biggest borrowers in domestic debt
markets, “are in a strong position to see off a slowdown in the
economy in 2013, based on their strengthened balance sheet and
solid profitability,” Fitch Ratings wrote in a Dec. 16 report.
“Subdued credit growth will allow banks to improve their
funding profiles.”

National Australia Bank Ltd., Westpac, Commonwealth Bank
and Australia & New Zealand Banking Group Ltd. have four of the
five highest trailing dividend yields among the world’s biggest
25 banks, with NAB in first place at 7.1 percent, Bloomberg data
show. Telstra pays out 9.2 percent.

‘Heightened Demand’

“We have seen evidence of heightened demand among
international investors for Aussie banks given they have some of
the highest yielding bank shares in the world,” said Craig
Williams, Melbourne-based analyst at Citigroup Inc. “This has
driven bank share price outperformance in the past six months
and may continue to be a supportive thematic for Australian bank
share prices into the new year.”

Equities advanced across the globe this year as central
banks from the U.S. to Europe and Japan took steps to support
growth. Buying of securities by the Federal Reserve, that will
probably push its balance sheet beyond $3 trillion, will stop
only when the labor market improves “substantially,” the Fed
said this month.

More Cuts

Traders see a 54 percent probability that the Reserve Bank
of Australia board will reduce the country’s benchmark rate to a
record-low 2.75 percent when it next meets in February,
interest-rate swaps data compiled by Bloomberg show. There’s a
64 percent chance the RBA will have cut by at least 50 basis
points by the middle of the year.

Australia’s economic growth will slow to 2.75 percent next
year from 3.5 percent in 2012, according to strategists’
forecasts compiled by Bloomberg. That’s still more than double
the 1.2 percent pace foreseen for Group of 10 currency nations.

Surplus Scrapped

Australian Treasurer Wayne Swan admitted Dec. 20 that a
“sledgehammer” hit to revenue makes a planned budget surplus
unlikely, adding to concern that economic growth is waning. A
slowdown in the pace of expansion in China, a faster drop in
commodity prices or an escalation of the sovereign-debt crisis
in Europe would temper expectations for equity-market gains,
said Kapstream Capital’s Kumar Palghat.

“The biggest risk is that you get some macro-economic
event that impacts the economy in a big way,” said Palghat, a
managing director at Kapstream Capital, which oversees A$4.7
billion. “Corporate earnings will be a lot weaker, equity
markets go down and it pushes investors into bonds.”

The South Pacific nation’s benchmark stock gauge trades at
14.2 times estimated earnings, compared with the 13.9 multiple
for both the S&P 500 and the MSCI World, according to data
compiled by Bloomberg. Australia’s S&P/ASX index’s forecast
dividend yield of 5 percent compares with 2.4 percent for the
S&P 500, the data show.

“Dividend yield has been the market darling,” said John
Conomos, Sydney-based quantitative analyst at Macquarie
Securities Ltd. “In a low return and low interest rate
environment, we expect this to be an ongoing focus for
investors.”